Flowing freely
Credit markets were more sedate in 2021 after the fireworks of the previous year, inevitably triggering a slowdown for many trading desks. For building out its flow credit-default swap desk in this environment while maintaining its leading position in structured derivatives, Citigroup is IFR’s Credit Derivatives House of the Year.
Structured credit derivatives have long been one of Citigroup’s calling cards within its global markets division. The US bank was a pioneer in the re-emergence of the bespoke tranche market over the past several years and it has dominated many of the more esoteric credit derivative products trading today.
Success in establishing itself as one of the top investment banks in flow credit-default swaps, and in particular the most widely traded CDS indices, had proved more elusive. So there is no doubt that 2021 represents a breakthrough year for Citigroup after recording a significant leap in CDS index market share following a revamp of its trading desk.
Citigroup was the number one dealer for CDX investment grade and CDX high yield on Bloomberg and Tradeweb in the second half of 2021 – from fifth in the first half – with a market share of more than 17% on both platforms, the bank said. That came alongside a doubling in its CDS index option volumes in 2021 from the previous year, while Citigroup also maintained a leading presence in single-name CDS as well as more structured credit derivatives.
“We’ve always been a dominant structured credit derivatives franchise,” said Vikram Prasad, global head of credit and municipal trading. “The strategy focus is to do the same thing on the vanilla derivative side of the business” with the goal of maintaining a complete offering for clients, he added.
Citigroup’s CDS expansion plans form part of a broader move to increase its presence in trading of simpler “flow” credit products. That includes a reshuffling of its corporate bond trading desk to increase its focus on algorithmic execution and portfolio trading, where large blocks of securities are bought or sold quickly in one go, and an expansion in fixed-income exchange-traded funds (where much of this activity can be recycled).
Growing demand to trade the relative value of ETFs versus CDS indices has made flow derivatives a natural part of that build-out. Davy Kim, a Citigroup structured credit veteran like Prasad, took over the bank's credit derivatives trading offering across both flow and structured activity to spearhead the push. That brought CDS options, index tranches, index CDS and index basis into one risk book, allowing Citigroup to sharpen its pricing. Kim heads North American macro trading and is co-head of synthetic structured credit trading.
Citigroup also hired externally, bringing in Antoine Pain as a senior index trader. And it invested in technology and infrastructure to enable traders to respond to client enquiries much faster in a market where speed of execution is increasingly important.
Personnel changes “combined with a series of technology enhancements on our end has allowed us to scale” up in index trading, said Prasad, and the bank intends to maintain a top two position. “That is core to our strategy, because index and index tranches link so well together that you have to maintain a dominant franchise in both.”
Clients certainly approve of the results. “What differentiates Citigroup is they are real partners for us. If you’re looking to move a substantial amount of risk, you need to go to someone you trust. They help us out on some sensitive, very large flows. It’s a very friendly and trustworthy relationship,” said a senior trader at a large institutional investor.
Citigroup has been careful not to take its eye off the ball in structured credit derivatives during its flow expansion. The bank estimates it holds a market share of more than 35% in US CDS index tranches, which it calculates using trade repository data as well as its own internal volumes, following a significant uptick in its activity last year.
Prasad says the bespoke tranche market, where investor returns are linked to the performance of a portfolio of corporate CDS that is divided into slices with varying degrees of risk, is still a “very vibrant part of our business” with the bank adding clients over the course of 2021.
Citigroup’s single-name CDS business remains similarly robust, thanks in part to its strong note repackaging business. “It is a complete franchise,” said Kim, highlighting Citigroup’s extensive presence in distressed, high-yield and investment-grade names across regions.
Kim said the bank had been very active on index basis trades, helping investors arbitrage the difference between CDS indices and their single-name constituents.
“We have multiple ways of sourcing the risk, then we have multiple outlets of placing the risk, so it’s a very natural thing for us to be doing,” said Kim.
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